CalFed Fashions a Security To Share Any Goodwill Award

California Federal Bank plans to offer its shareholders an opportunity to benefit from any windfall resulting from a pending lawsuit against the federal government, but the actual payout per share is likely to be small.

CalFed, which is based in Los Angeles, said Tuesday it had filed a registration statement with the Securities and Exchange Commission to issue a new security to its shareholders. Under the plan, one "goodwill participation certificate" will be issued for every 10 shares, allowing the holder of record to receive a portion of the cash proceeds, if any, from the litigation.

"We have created a mechanism through which our shareholders will be able to directly participate in a favorable outcome of our goodwill lawsuit," said president and CEO Edward G. Harshfield. "By making this security transferable, we will be providing a vehicle by which the market can recognize our claims against the government."

CalFed, which has $14 billion in assets, filed suit in 1992 in the U.S. court of claims in Washington alleging that federal thrift regulators had breached a contract over "supervisory goodwill." As was the case with many healthy thrifts during the 1980s, CalFed had been encouraged to take over insolvent S&Ls with the understanding that it could include the resulting goodwill in its regulatory capital for up to 40 years.

The thrift-bailout law of 1989 annulled that promise and forced the thrifts to write off the goodwill by this January. CalFed's $485 million worth of goodwill left it so severely undercapitalized that the company was forced into a massive recapitalization program.

"Our shareholders unquestionably suffered financial damage as a result of this legislative action," Mr. Harshfield said. "The government violated its contract with the bank and took its property, and the shareholders deserve to be compensated fairly for that violation."

CalFed's suit has been stayed pending the resolution of three other cases involving goodwill claims.

There are more than 50 goodwill cases in all. The largest and most important is a $1.4 billion claim from Glendale Federal Bank. That case was argued in February 1994, and a decision is expected anytime from the U.S. Court of Appeals for the Federal Circuit.

Until recently, the thrifts were given little chance of prevailing against the government. Then, in February, the Federal Deposit Insurance Corp. was forced to pay $6 million to one plaintiff. In a second case, it faces a $26 million judgment, which is now on appeal.

On March 3, FDIC Chairman Ricki Tigert Helfer testified before Congress that her agency was beginning to set aside reserves to pay for the goodwill claims. She also revealed that the Office of Thrift Supervision had estimated the government's potential exposure at $1.2 billion to $4.9 billion.

"The probability has increased that these companies could get a significant recovery," said Joseph A. Jolson, an analyst with Montgomery Securities in San Francisco.

CalFed executive vice president James F. Hurley said the goodwill participation certificate idea was hatched several months ago.

"This was an idea based on the observation that the market was not ascribing any value at all to the bank's claim against the U.S. in a case that we think has some real strength to it," Mr. Hurley said.

CalFed is seeking permission to trade the new securities on the Nasdaq over-the-counter exchange. The 5.1 million freely transferable certificates will entitle holders, in the aggregate, to receive 25% of the cash recovery from the goodwill lawsuit, after expenses and taxes are taken out.

Mr. Jolson said that probably wouldn't prove very enticing to investors. "The problem with this security is it's too small," he said.

"Let's say they win $200 million, to pick a number. It would only be $50 million of value. There just isn't a big enough market value potential to get anyone interested in it."

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